All Politics is now Global

One month ago, when we last looked at the Fed’s update of Treasuries held in custody, we noted something troubling: the number had continued to drop sharply, declining by another $14 billion in one week, and pushing the total amount of custodial paper to $2.788 trillion, the lowest since 2012. One month later, we refresh this chart and find that in last week’s update, there is finally some good news: foreign central banks finally bought some US paper held in the Fed’s custody account, which following months of liquidation, rose over the past two weeks by $23 billion, the biggest two-week advance since November of 2016, pushing the total amount of custodial paper to $2.816 trillion, the highest since early October.

That was the good news, and we use the term loosely in as much as the custody account can be used as a proxy of foreign buying, which according to most rates watchers, it can.

Recall that in mid-November, we reported that in the latest 12 months we observed a record $375 billion in Treasury selling by foreign central banks in the period August 2015-September 2016, something unprecedented in size.

Fast forward to today when in the latest monthly update for the month of October, we find that what until a month ago was “merely” a record $375 billion in offshore central bank sales in the LTM period ending September 30 has, one month later, risen to a new all time high $403 billion in Treasuries sold in the past 12 months.

As the chart below shows (see chart above), there has never been such an aggressive selling of US Treasuries over a 12 month period in history.

The biggest seller, and keep in mind that TIC data is on a market-price adjusted basis, was once again was China, which in October “sold” a record $41 billion in US paper (the actual underlying number while different, as this particular series is adjusted for Mark to Market variations, will be similar), and a massive $125 billion in the last 4 months, bringing its total Treasury holdings to just $1.116 trillion, the lowest amount of US paper held by Beijing since 2010. In the process, China has now been overtaken by Japan for the top US creditor position in terms of total holdings with $1.132 trillion, for just the second time.

It wasn’t just China: Belgium, which has long been rumored to be the venue where China’s keeps its “secret” offshore Treasury holdings couretsy of Euroclear, also dumped its TSY holdings, and in October its stated holdings (which again have to be adjusted for MTM), tumbled from $143Bn to $117Bn, the lowest since the summer of 2015.

Furthermore, as we have shown previously, when superimposing China and Belgium’s holdings together, these tend to allign almost perfectly with the monthly change in Chinese reserves, which as reported before, have been declining sharply in recent months as a result of China’s aggressive attempts to prevent a sharp devaluation of the Yuan. This can be seen on the chart below, and confirms that at least when it comes to China, the reason for the selling of Treasurys has been due to reserve liquidation.

As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a disturbing pace, something which in light of the recent surge in yields to over 2 year highs, appears to have been a prudent move.

In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia and other petroleum exporting nations, it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country’s soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.